I was raised in the church of free trade and drilled in the catechism of comparative advantage. A foundational principle of free trade, it is the idea that even if Country A is more efficient at producing everything than Country B, each country still benefits from specializing in producing what it makes relatively more efficiently and then trading with the other. (For an explanation of comparative advantage, please see Appendix A).
The concept of free trade is elegant and correct even when it is honored more in the breach than in the observance – up to a point. When one country plays by the rules and most others don’t, the long run consequences for the former are not good. Free trade is not free.

https://www.amazon.com/No-Trade-Free-Changing-Americas/dp/0063282135

As Thomas Sowell has said, “There are no solutions, only tradeoffs.”

https://www.amazon.com/Conflict-Visions-Ideological-Political-Struggles/dp/0465002056

American policy on free trade and tariffs must be evaluated in terms of its costs as well as its benefits.

Undoubtedly, America’s policy of allowing largely unfettered access to its markets has conferred major benefits:

• Imports from China in particular have kept prices paid by American consumers lower than they would have been had those products been produced in the United States.
• The savings from the availability of cheaper goods from abroad enabled consumers to buy more goods than they could have otherwise; to the extent that consumers are likely to use some of that extra purchasing power to buy goods made in America, free trade can be said to help domestic employment.
• Competition from imports forces domestic producers to minimize costs and innovate.
• The profits that foreign companies get from exports to the U.S. can be used for investment in the U.S., a further source of employment.

In theory, trade imbalances are supposed to even out over time. Higher demand for the currency of a net exporting country should cause its price to rise while the price of the currency of a net importer should fall. The change in the relative prices of exporter and importer currencies should eventually make the products of importing countries more competitive.

This self-correcting mechanism has not been working for the United States. Since 1976, its trade deficit has been high and rising. Consequently, American investments that foreigners own now exceeds the foreign investments Americans own by $23 trillion versus $3T twenty years ago. While there are many factors contributing to this trend, trade policy is certainly important, probably the most important.

The short run benefits from America’s open market policy must be weighed against the long-run costs. The latter turn out to be highly significant:

• While manufacturing output in the U.S. has risen, mainly because of automation, thousands of communities have lost manufacturing jobs and have been unable to replace those jobs with alternatives offering comparable pay and security. The economic and social costs to Americans unable to offer their services in a global market have been devastating:
• Vital skills and expertise have been lost;
• Income inequality has risen. Unlike Americans able to access a global market for their services ( investment bankers, lawyers, people in media and entertainment), working people, the ones who make things and do the hard, dirty work, have found their incomes stagnating. The elites, having benefited mightily from the trade arrangements of the last several decades, are happy with the status quo; working people are justifiably angry. No American, however, should be comfortable that today the top 1% of the population by wealth has more than the middle 60%.
• As skills and manufacturing infrastructure have eroded, so has America’s manufacturing competitiveness and capability for innovating. According to a study by the Australian Policy Institute, the United States now lags China in 57 of 64 key technologies.
• American trade policy under Presidents Clinton, Bush, Obama, and Biden has encouraged Americans to exchange long term productive assets for short term consumption. Once the imported goods have been consumed, they are gone forever. By contrast, the assets given up to pay for consumption can produce cash flow for their new owners indefinitely. Countries exporting to the U.S., especially China, have used their trade surpluses to buy American equities, American real estate, American farmland, and American debt, primarily U.S. treasury securities, What Americans have not seen is a widespread “Build it in America” program. Nor have we seen trade reciprocity. China, the EU, Canada, and Mexico, for example, have not just used tariffs and non-tariff barriers to protect their companies, but In essence have built an entire industrial policy around pursuing their own national interests to the detriment of America’s.

The status quo is unacceptable; policy should support the flourishing of all Americans.

What is to be done? The first step is to define the problem. The Trump Administration, correctly in my view, defines the problem as a chronic, multi-decadal trade imbalance. There is nothing wrong with a trade deficit per se, but a perpetual non-self-correcting trade deficit is another matter altogether. No country, least of all the United States , should be chronically in deficit.

The root cause of this problem is not that American workers are somehow inferior to their foreign counterparts, although they do have the burden of a dysfunctional public education system thanks to the vile teachers’ union, the National Education Association. The heart of the problem rather is that the American government has allowed its main adversary, China, and its “allies” to implement a phalanx of industrial and other policies adverse to its interests:

Europeans use a value-added tax (VAT) to give their exporters a price advantage over Americans. European exports are exempt from the VAT, but imports from the U.S. are not.

As Victor Davis Hanson has noted, our “neighbors”, Canada and Mexico, have been equally as assertive in pursuing their national interest as China:
https://www.youtube.com/watch?v=grsgFWfTZY0&t=1875s

• Canada:
  • is running a $63 billion trade deficit with the U.S. via asymmetrical tariffs;
  • Pays only 1.36% of its GDP for defense, preferring to get a free ride under the American defense umbrella, which costs America 3.5% of GDP;
  • Does not patrol its border to prevent illegal aliens from entering the U.S.
• Mexico:
  • Is running a $175 billion deficit;
  • Evades its free trade agreement with the U.S. by letting China assemble parts in Mexico for shipment to the U.S.;
  • under the Biden Administration sent 12 million illegals to the U.S., who promptly overwhelmed our health and welfare systems;
  • Has been dilatory in cracking down on cartels importing raw fentanyl from China.

American trade policy has been special only by virtue of its not putting American interests first.

If the American government wants to give all of its citizens an opportunity to build a better life for themselves and their families., it has no choice but to fight back. America’s “friends” will not change their behavior unless the consequences of their maintaining the status quo are worse. Without some means of countering the numerous ways foreign countries discriminate against American made products, America’s chronic trade deficit and the ills that accompany it will persist.

The core strategy for a better deal for the American worker is aggressive promotion of ”make it here” along with measures to counteract the practices of other countries that discriminate against American products. Manufacturing matters; it employs 80% of our engineers, accounts for about 90% of private sector R&D, and , most importantly, is the best way for the American worker to create a solid future for himself and his family. Nothing is a panacea by itself, but, a focus both on encouraging “made in America” and on combatting unfair trade practices is a good place to start.

One tool for promoting balanced trade globally and more manufacturing in the USA is the use of tariffs. They may raise prices in the short run for the American consumer and ceteris paribus can shield American manufacturers from competition. Adroitly applied, however, they can have benefits whose value exceeds the drawbacks:

• Industries whose products or services are essential to national security need protection. It is lunacy to entrust control over key resources and capabilities to our adversaries. The definition of “essential”, however, should not be so elastic as to provide protection to companies that don’t care to innovate.
• Tariffs, or the threat of imposing tariffs – if adroitly used – hopefully will incentivize other countries to lower their tariffs and other barriers to the purchase of American goods. Since America has large trade deficits with major trading partners, the threat of higher US tariffs should get their attention. The idea is not to build protections against competition but to encourage reciprocity. “You drop your tariffs, and we’ll drop ours.” Tariffs are a blunt instrument with serious drawbacks, but persistence of the status quo long run is worse.
• Economists tell us that tariffs raise prices to consumers long run, but it is not clear that the net effect would be meaningfully negative when taken in context with other measures: tax cuts, deregulation, major cuts in the size, cost, and scope of the federal government. It is worth noting that China – with the highest trade barriers in the world – is not experiencing systemic inflation.

Is there an alternative to the tariff tool that achieves the desired result with fewer drawbacks? Reciprocity is a good idea in principle but difficult to implement in practice. One alternative that deserves careful study is the imposition of a border adjustment tax (BAT). Under a BAT, exports are exempt from taxation, but imports are not. Companies that both export and import would get a tax credit for exports. Compared to tariffs, a BAT

• Applies to all exports and imports
• Requires legislation to be implemented (tariffs do not)
• Is more complicated and time-consuming to implement
• May be more trade and price neutral in the long run.

In sum, a permanent American trade deficit is harmful to the American working man and cannot be allowed to continue indefinitely; a better balance of trade between the United States and the rest of the world must be restored long run. Yes, raising American tariffs could trigger a trade war, but only if Americas’ trading partners whose trade barriers already are higher than America’s choose to respond in kind. The United States must use its economic power to assure fair treatment. If not tariffs, then what; if not now, then when?

Appendix A

How the Law of Comparative Advantage Works

The law of comparative advantage explains why in theory two countries can benefit from trade even if one country is more productive in every respect than another. The key is how relative costs in each country compare.

Let’s say Country A and Country B both produce whiskey and video games, but a worker in country A can produce both whiskey and video games in fewer hours than his counterpart in Country B, as shown in the following table:

Hours of work to produce 1 unit of

	whiskey	video game
Country A	9	8
Country B	10	12

 
In this hypothetical example, it takes a worker in Country A only 9 hours to produce one unit of whiskey versus 10 hours for his counterpart in Country B. Similarly, it takes a Country A worker 8 hours to make one unit of a video game whereas it takes a Country B worker 12 hours to produce the same thing. Country A workers are more efficient in both industries. So why trade?

In Country A, the amount of time (9 hours) to produce I unit of whiskey can alternatively be used to produce 9/8 (1.125) video game units. In Country B, the time (10 hours) to produce 1 unit of whiskey will yield 10/12 (.83) of a video game unit. Thus, a unit of whiskey gets you more video game units in Country A than in Country B, (1.125 versus .83), so it behooves Country B to produce whiskey and sell it to Country A.

Conversely, the time in Country A to produce I video game unit (8 hours) gets you 8/9 (89% of a unit of whiskey; in Country B the production time for a video game unit (12 hours) could be used to produce 12/10 (1.2) units of whiskey. Since a video game unit can be exchanged for more whiskey in Country B than in Country A (1.2 versus .89), Country A should produce video games and sell them in Country B in exchange for whiskey.

Without trade it takes 9 + 8 (17) hours in Country A and 10 + 12 (22) hours in Country B to produce a unit of wine and a unit of video game in each country for a total of 4 units. If, however, Country A uses 17 hours to produce video game units, it will produce 17/8 or 2.125 units; if Country B uses 22 hours to produce whiskey, it will produce 22/10 or 2.2 units. Through specialization, a total of 4.325 units is produced versus 4 units without specialization and trade.